Kirsten Bartok: The truth about investing in corporate jets
Looking to understand the truth behind corporate jet investment? Jim Jones highlights some points towards made by Kirsten Bartok, vice presentation structured finance, Hawker Beechcraft, at International Corporate Jet & Helicopter Finance 2011.
While the leasing market for commercial jets is based on well-understood financing techniques and has attained a high level of
sophistication, that for investing in corporate jets is at an earlier stage of development. For many would-be participants the corporate jet market is one of misconceptions and, for the present, incomplete information.
As Kirsten Bartok, vice president structured finance at Hawker Beechcraft, pointed out in her presentation at International Corporate Jet & Helicopter Finance 2011, cutting through the normal undergrowth of misconceptions and of misleading data is only part of the exercise. A different approach is needed to that employed by the leasing sector which has its own way of looking at assets, how it values them and how it finances them using well-established leasing products.
Bartok’s broad analysis of the investment market kicked off with what might appear to be a heresy: “Official” price information can be highly unreliable, even the figures quoted from Amstat and JETNET, the sector’s two “bibles”. The fact is that the Amstat and JETNET quotes are listed prices – the prices at which sellers have put their assets onto the market, but prices that regularly match those at which sales eventually occur. In response to a question from Lombard’s Gary Crichlow who wondered if disparities could be as high as 30%, Kirsten appeared cautious, reckoning that disparities could be as great as 10%-15%.
Why such a margin of error? Bartok presented several reasons. She took the example of the embarrassment of the auto industry bosses after it was disclosed that they had flown to Washington in individual private corporate aircraft to beg for federal bail-outs. Their responses were, ostensibly, to put those planes up for sale, but at listed prices that had little hope of being achieved. The auto bosses may have looked good to the man in the street and even to their own board colleagues, but they kept their planes and in the
process helped exaggerate prices in the second-hand market.
This was but one example. But for jet investors, the reality of second-hand prices is all-important. And then there’s the question of price volatility. Bartok took the view that volatility lay more in the eye of the beholder than in reality. As far as numbers are concerned, Kirsten reckoned, the allegations of extreme volatility don’t add up. As a measure of the market’s liquidity she cited the facts that the world’s entire fleet of civilian aircraft is reckoned at 22,000 of which 18,000 were corporate jets. But last year (2010) only some 1,500 corporate jets were traded along with about 1,000 commercial jets. That’s scarcely the sign of a roiling-boiling market.
Five or six years back there were the makings of a bubble. Between 2005 and 2007 there were a lot of speculators in the market who were buying an quickly selling at a profit to buyers who were not prepared to wait for delivery of a new aircraft from a manufacturer. The manufacturers who saw what was happening tried unavailingly to hold list prices, but they were general unable to halt speculators who would put down a deposit for a new plane and flip the aircraft to another buyer as or before they would have needed to take delivery.
By 2008 the surge was ending which led many speculative buyers to walk away from their deposits and purchase contracts. As Kirsten put it, the market “volatility” that people talk about was, in reality the bubble of the latter half of the last decade.
And she pointed to other misconceptions. What about the cost of converting a customized aircraft? Forget the old chestnut of some owners installing on-board showers. In principle all that generally needs doing is rebuffing the outer skin and, maybe, changing the interior carpeting. To change the whole interior and exterior paintwork should set you back anything from
$200,000 to $500,000.
Then Bartok delved into the misconceptions of would-be investors over the cost of interval checks – anything fro $20,000 to $200,000 or maybe even $300,000 depending on the aircraft’s size or type.
Turning to the criticisms leveled at business jets as an investment – there is some validity to the contentions that there is no business model as there is in the commercial leasing sector. Many investors may not understand the asset, how to re-sell it and how to utilise it. But annual degradation is generally only in the region of 4%-6%, which is less than for the commercial sector where aircraft fly many more hours each year. Commercial jets can put in twice or three times as many flying hours as a standard corporate jet, with the result that corporate jets last longer and have better residual values than their commercial cousins.
Let’s return to something Kirsten mentioned previously, market liquidity. The portion of the corporate fleet traded is greater than that of the commercial fleet, meaning greater availability of suitable investment opportunities. Depreciation tax breaks in the US lead American business jet buyers to trade their jets five to seven years from new – the quality of fresh material entering the second-hand market is beyond dispute particularly if the aircraft has been bought with an engine maintenance contract. Certainly depreciation tax rules are far less favourable in Europe or other markets, but that could change. But the upshot of the US depreciation tax breaks has
resulted in the US having 30% of the world’s business jet fleet – the potential for growth elsewhere should non-US tax rules change was left unsaid.
Finally, do changes in fuel prices affect the business jet market? They do not have any material influence on the number of hours flown or on the frequency with which corporate jets are traded for newer ones that are more fuel efficient.
The debate on the advantages of corporate jet investment is at an early stage. And many prospective investors’ understanding of the market’s dynamics is developing – which was the intention of this conference and of others that will follow. But getting down to fundamentals and in answer to a question from IBA’s Phil Seymour, Kirsten restated the ground rules: Make sure you make a rigorous
examination of the log of the aircraft you want to invest in; make sure you have a reputable and reliable operator to manage the aircraft on your behalf. And ensure that your own aircraft’s logs are kept meticulously – it’ll be a telling point when it comes time to re-sell.